Go-to stocks for top shelf fund managers
Oil Search and WiseTech are two notable inclusions in Fidelity Australian Equities' list of top 10 holdings, which is otherwise dominated by names from among the ASX's largest 20 companies.
Oil Search (ASX: OSH) and WiseTech (ASX: WTC) are two notable inclusions in Fidelity Australian Equities' list of top 10 holdings, which is otherwise dominated by names from among the ASX's largest 20 companies.
These funds from Pendal, along with other prominent fund managers Fidelity and Schroders, carry Morningstar's Gold Medal ratings.
The financial sector is a recurring theme. The first two funds are entirely focused on large-cap companies, while the Schroder offering also holds small- and mid-cap companies.
Commonwealth Bank (ASX: CBA), Westpac Bank (ASX: WBC) and ANZ Bank (ASX: ANZ) feature across all three, while Schroder also holds National Australia Bank (ASX: NAB), and Suncorp (ASX: SUN) ranks among Fidelity's top five weightings.
But from outside the ASX 20, Oil Search is an Australian-listed oil and gas producer based in Papua New Guinea. Most of its perceived value resides in the company's substantial gas resources, which are in largely isolated areas of PNG but rich in valuable condensate by-products.
This increases the value of PNG gas, but the entire proposition carries substantial risk because of investment needs and the nation's political uncertainty, says Morningstar senior equity analyst Mark Taylor.
He left fair value estimate for Oil Search unchanged last month, following the company's fiscal 2018 results – a 13 per cent year-on-year increase in net profit after tax, to US$ 341 million.
The performance improvement was largely due to increased production, up 20 per cent on the prior period, which was marred by a major earthquake – and a return to similar production levels.
"Our 2019 production forecast is unchanged at 29.6 million barrels of oil equivalent, near the midpoint of between 28 million and 31.5 million barrels guidance," says Taylor.
At its share price of $7.98 at midday today, Taylor regards the no-moat company as "materially overvalued" and believes the market is not sufficiently pricing-in risks. Morningstar's fair value estimate incorporates a 3 per cent sovereign risk premium.
"Also apparently not considered by the market is net debt, or if considered, then chiefly the positive side of the ledger," Taylor says.
One of the WAAAX
WiseTech Global – part of the WAAAX cohort of local technology firms alongside Appen (ASX: APX), Afterpay (ASX: APT), Altium (ASX: ALU) and Xero (ASX: XRO) – is a narrow moat-rated software firm that serves the Australian logistics sector.
Though Morningstar equity analyst Gareth James recently lifted his fair value estimate by 3 per cent to $6.80 a share, WiseTech’s $23.10 share price as of midday marks it as considerably overvalued.
However, James likes the firm's business model, which generates revenue based on the extent to which customers use its software rather than a traditional subscription model.
"This model exposes revenue to long-term world trade growth, enabling WiseTech to continue growing even if its customer base doesn’t," he says.
WiseTech's revenue has grown at a compound annual growth rate of 34 per cent in the four years to fiscal 2018, and Morningstar anticipates 15 per cent CAGR over the next decade.
"Although WiseTech lacks the scale of much larger enterprise resource planning software providers such as SAP and Oracle, the company’s niche focus and innovative culture have enabled it to outmanoeuvre larger peers," James says.
Moat-worthy plastic packer
The stock pickers at Pendal Group - formerly known as BT Financial Group – like packaging firm Amcor (ASX: AMC), which Morningstar awards a narrow moat.
The multinational plastic packaging company has operations in 43 companies, including significant emerging market businesses that generate around one-third of total sales.
"Its capabilities span flexible and rigid plastic packaging, which sell into defensive food, beverage, healthcare, household, and personal-care end markets," says Morningstar equity analyst Grant Slade.
He recently left his $14.60 fair value estimate unchanged, despite a weaker than expected financial result for the first-half of fiscal 2019.
In response, Slade slightly reduced his full-year fiscal 2019 growth expectations to 5.8 per cent, from 6.2 per cent previously.
"Nonetheless, our full-year operating income forecast is largely unimpacted at US$1,125 million and our medium-term expectations are unchanged," Slade says.
Dual-listed building materials supplier
Having just returned to profitability in the first-half of fiscal 2019, Australian- and New Zealand-listed company Fletcher Building (ASX: FBU) is an interesting inclusion in Schroders top 10.
The building materials company reported NZ$89 million in net earnings for the period, up from a loss of NZ$273 million a year earlier, even as weakening house prices in some of Australia's largest housing markets took a toll.
Residential construction comprises around 40 per cent of group revenue, according to Morningstar director of equity research, Adam Fleck.
He says cooling house prices weighed on performance during the half, at the same time as management sought to cut costs by selling off loss-making business units.
However, Fleck sees a turnaround opportunity for Fletcher's Australian business in cost restructuring and anticipates improved margins in the second half.